Inflation, Markups and Monetary Policy

30 Pages Posted: 2 Jun 2006

See all articles by Magnus Jonsson

Magnus Jonsson

Sveriges Riksbank

Stefan Palmqvist

affiliation not provided to SSRN

Date Written: June 2, 2006

Abstract

The correlation between persistent changes in the markup in one sector of an economy and the inflation rate is quantified in a 2-sector dynamic general equilibrium model. How this relationship is affected by monetary policy is also studied. We find that the correlation is in general positive under an exogenous money growth rule as well as under an inflation targeting rule. That is, a decrease of the markup leads to a decrease in the CPI-inflation rate. However, if inflation is measured by an optimal price index that also includes the wage rate the correlation is slightly negative. That is, a decrease in the markup leads to higher inflation rates. This is due to higher wage rates. The correlation is sensitive to whether the policy rule includes an output term. If monetary policy accommodates output strongly the correlation is negative. A decrease in the markup leads to higher inflation rates, as measured by both the CPI and the optimal price index.

Keywords: Price indices, monopolistic competition, monetary policy rules

JEL Classification: D43, E31, E52

Suggested Citation

Jonsson, Magnus and Palmqvist, Stefan, Inflation, Markups and Monetary Policy (June 2, 2006). Riksbank Research Paper No. 2, Available at SSRN: https://ssrn.com/abstract=906098 or http://dx.doi.org/10.2139/ssrn.906098

Magnus Jonsson (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.riksbank.com/research

Stefan Palmqvist

affiliation not provided to SSRN

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